Hedge Fund Service Providers Expanding During Market Turmoil

If you read a lot of the stories which have been coming out in the last couple of weeks, you would think that the hedge fund industry was about to go the way of the dinosaur.  (See NYT Deal Book Article)  Personally, I think the exact opposite – that the hedge fund industry, after a bit of a cooling off period, will see assets come back to the table in greater force than before.  I also believe that hedge funds will become more institutionalized products with more robust due diligence procedures as a standard practice and that hedge funds will (eventually) emerge as retail products.  Whether any of the above happens quickly or slowly remains to be seen, but there were four separate press releases we published last week that shows hedge fund service providers are especially bullish on the industry.

The four press releases deal with (1) expanding hedge fund due diligence; (2) increased investment from single family offices; (3) prime brokers continuing expansion based on industry changes and (4) a hedge fund administrator moving into the prime brokerage arena.  I’ve highlighted the takeaways from the press releases below.

1.  Hedge Fund Due Diligence Firm Expands. (Link to release)  The press release below provides details on a hedge fund due diligence firm which is expanding its operations.  In the coming months and years hedge fund due diligence is poised to become a central part of the hedge fund investing process. Specifically, the press release quotes the new hire as saying… “in the current markets, hedge fund investors face multiple challenges that, more than ever, involve operational risk. Investors must understand many new issues, including counterparty risks, the impact of FAS 157 and how to deal with funds which impose gates, suspend redemptions or restructure. Castle Hall helps investors enhance their due diligence program and better respond to these new challenges.”  I completely agree.  For more information on due diligence, please see the following HFLB articles:

2.  Single family offices to increase hedge fund investing in the next year. (Link to release) Rothstein Kass, a well known hedge fund audit and administration firm, released a study which indicates that Single Family Offices will continue to invest in hedge funds.  This press release states two interesting items from the report:

Good Performance and Additional Investment – family offices are generally happy with the performance of hedge funds and will commit more money to funds within the next twelve months.

Transparency – the release states that more than 70% of single family offices said that a lack of transparency in their hedge fund investments is concerning.  Additionally, a director of Rothstein Kass is quoted as saying  “while high-net-worth individuals generally recognize advantages of hedge fund investing, they are frequently confounded by the growing roster of products and services available.”  This really comes as no surprise and signals that hedge fund due diligence will become a major focus from here on out.  Transparency is achieved not only through the hedge fund manager, but also through hedge fund service providers who have developed technology solutions to offer to hedge fund managers.  On a going forward basis hedge funds are going to need to be more transparent.  For more information, please also see:

3.  Prime Broker continues to expand during industry changes. (Link to release) The prime brokerage industry is going through a lot of changes currently as the biggest prime brokerage firms, Goldman and Merrill have changed into bank holding companies.  Additionally, with the collapse of Lehman, the conventional wisdom is for larger hedge funds to prime with multiple brokers.  As this trend continues to develop I expect that more firms will jump into the prime brokerage business and that prime brokers will begin to offer more back office and administration services to hedge funds.  New and surviving hedge funds should benefit as prices decrease and quality of services increase.

4.  Hedge fund administration and back office firm, announced that it is expanding into hedge fund prime brokerage. (Link to release) This press release highlights two specific interesting trends in the hedge fund industry.  The first is the move from segregated service providers to shows which provide a whole suite of services including back office, admin and prime brokerage.  The second trend is the move from one main prime broker to housing assets at many prime brokerage firms.  We saw with the collapse at Lehman and the corresponding freeze of some hedge fund assets, that small and large funds alike want to diversify across brokers and custodians.  I believe Conifer is the first in a wave of admin/ back office firms which will put a shingle out as a mini-prime or introducing prime broker.


While none of these individually provide conclusive evidence that the industry will remain strong in the coming months, it does show that people in the industry are investing in the infrastructure which will allow the industry to expand in the coming years. Please feel free to contact us if you have questions or comments on any of the above.

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